Chip Stocks Take A Beating On Growing Concerns On Demand

By Eric Savitz

Uh oh.

Chip stocks are taking a beating today on growing concerns that aggressive ordering in the first half of the year, combined with a slowdown in Europe, could result in second-half slowing in the PC sector.

Some of the worries are coming from the disk drive sector. Hutchinson Technology(HTCH), which makes suspension arms for hard drive, late yesterday said customers have reduced their production plans.

J.P. Morgan analyst Mark Moskowitz this morning trimmed his estimates on both Seagate(STX) and Western Digital(WDC), asserting that “checks indicate lighter than expected demand conditions due to moderating growth in Europe and Asia.” He now sees the industry posting a 4% sequential drop in unit growth for Q2, rather than the 1.9% increase he had been forecasting previously. For Seagate’s June quarter, he now sees profits of 84 cents, down from 93 cents. His target on the stock drops to $23, from $27.

For Western Digital, he makes a similar move, cutting his target to $51, from $54, while cutting his June quarter EPS estimate to $1.43, from $1.48.

J.P. Morgan also trimmed estimates on 2010 PC unit growth to 18.2%, from 18.8%; for 2011, they now see 12.4%, up from 12%. Based on slower anticipated growth in both PCs and disk drives, Morgan chip analyst Harlan Sur trimmed estimates and price targets for both LSI(LSI) and Marvell(MRVL). The target for Marvell falls to $26, from $27; for LSI he goes to $6.50, from $7.450.

Meanwhile, UBS analyst Uche Orji wrote a cautious take on the chip group this morning, asserting that “after four quarters of above trend growth,” the sector is likely “to regress to normalized trends.” That factor, combined with macro risks in Europe, inventory normalization and seasonal weakness, “could lead to bookings moderation and a possible inventory correction, creating risk to the Q3 sales outlook,” he writes. The sector, the firm contends has “downside risk near term.”

Hewlett-Packard's (HP's) notebook shipments in May 2010 reached only 2.6-2.7 million units, lower the company's original expectation of 3.2-3.4 million units due to dropping shipments in both Europe and China markets, according to market watchers.

HP recently lowered its notebook shipments to Europe due to the bond crisis in the region, meanwhile, demand for HP's PCs in China has also weakened because of recent complaints about faulty PCs by China consumers.

Since HP shipped over nine million notebooks in the first quarter and the company's combined shipments in April (2.8-3 million units) and May were only 5.4-5.7 million units, the company will need to ship at least 3.3 million in June to stay flat on quarter. The unsatisfactory performance could also impact HP's annual shipment goal of 45 million units for 2010, the market watchers noted.

However, some market watchers believe postponed demand from the second quarter will spur HP's shipments in the third quarter and bring up overall performance in the second half.

HP's shipments in May are also expected to affect the performance of its manufacturing partners Quanta Computer, Inventec and Compal Electronics, the market watchers added.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.